2 September 2009

Burton Abrams and George Parsons of the University of Delaware evaluated the efficiency of the recently concluded Cash for Clunkers (CARS) program and concluded that the cost exceeds the benefit by approximately $2,000 per vehicle, or close to $1.4 billion in total. Their paper appears in the online journal The Economists’ Voice.

Abrams and Parsons calculated the average national cost per vehicle turned in to be scrapped under CARS at $2,600. There is a $4,200 loss to the taxpayer (the average subsidy), but the CARS participant gains $1,600 per vehicle ($2,600 in the value of the price subsidy less the $1,000 loss of the clunker).

Assuming 12,000 as the average miles driven per year and using the average mpg of the retired vehicles (15.8 mpg) and the newly purchased vehicles (25.0), they calculated that the program cut gasoline consumption by some 280 gallons per year per vehicle. Assuming the average clunker would have lasted 3 more years (at which time a new, higher mpg vehicle would have been purchased), the gasoline savings works out to 804 gallons per vehicle on average.

Using an estimated cost of $0.71 per gallon for CO2 and criteria pollutant costs (Jason Hill et al., PNAS), Abrams and Parsons calculated the environmental benefits of the clunker program (ignoring discounting) at about $596 per vehicle.

With per vehicle environmental benefits at $596 and the costs at $2,600 per vehicle, the clunker program is a net drain on society of roughly $2,000 per vehicle. Given the approximately 700,000 vehicles in the program, we estimate the total welfare loss to be about $1.4 billion.

The welfare loss would be even greater if we fine tuned our estimate of the social cost per gallon to account for the spatial mix of clunkers...Even if the environmental gains were double our estimate, the net drain would still be close to $1 billion. While a more rigorous analysis would
no doubt adjust these figures, we doubt that the basic conclusion would change.

Comments

What are the costs of people losing their auto industry jobs & health benefits and using emergency rooms for their healthcare? What are the benefits of becoming, ever so slightly, more energy independent from thug regimes in the middle east and South America (ie. Chavez)? When these "scholars" start acting scholarly, maybe they'll get a little credibility.

Well...I have mixed feelings about this.
1. Higher gas prices could make it look more favorable.
2. Requiring higher mileage to qualify would have made it look more favorable, but fewer "American" cars would have qualified (although Toyota, Honda and others make cars in America).
3. It's not clear from the above that they added in the cash savings from the 804 gallons of gas saved over 3 years. (804 gallons/vehicle)x($3.50/gallon)= $2,814/vehicle for the fuel savings alone, or an additional $1.9 Billion for the 690,000 vehicles.
4. There may also be a value to society for the scrap metal and salvage of the clunkers. What's a billion pounds of car worth these days for salvage?

Their report doesn't do any research into spillover affects of the program, that is customers that went down to get cash for clunkers and found their trade was worth more, so they ended up making a car purchase that they might have postponed. It also fails to address the economic stimulus affect of injecting that much money into a part of the economy hit hard by the banking debacle. Additionally they fail to address the stimulus benefits of that money, previously being used to pay for gas, now being available for other spending. And the last thing they failed to calculate is whether the weighted average of improved MPG is better than the average. For example, if the average is a 10 MPG improvement, but the people that purchased the better mileage cars also drive more than the average, then the economic impact might be higher. I’d also like to know where they got their number saying that these people would have traded in 3 years anyway. Most of the cars were very old, how do they know if they would have dumped them so soon.